Energy prices were intensely complicated last week.
- The situation in Ukraine dominated discussion
- Expectations that the US would become insulated from foreign geopolitics proved wrong
- Distillate fuel oil prices softened in the April contract, pointing up the discounts still available for next winter
- Employment continues to grow in the United States
- Supply/demand balances were little changed for the week ending February 28
- Withdrawals of natural gas from underground storage were substantially larger than expected but going into shoulder season, upside price pressure was notably lax.
Alan Levine
Chairman, Powerhouse
The Matrix
The situation in Ukraine dominated petroleum news over the course of last week. The U.S.’s new and much touted independence from international geopolitics was not apparent in Monday’s price action. Prices for both WTI and Brent crude oil added about $2.00 during the day. Subsequently, prices have eased. Brent prices are now lower than during the past three weeks. WTI is retreating from recent highs but WTI prices had been moving steadily higher in concert with colder weather. The decline in WTI has been more measured than Brent. Now, as winter’s grip eases, WTI is falling and gasoline crack spreads are starting to strengthen.
Western nations have been dealing with the Russian gambit on a diplomatic level. Responses that have been proposed include efforts to isolate Russia and expel Russia from the Group of Eight industrialized nations. Closer to the energy sector, some have proposed a crude oil release from the SPR or even lifting limits on commercial exports of crude oil and natural gas.
Distillate fuel oil prices have softened in the April contract. Nonetheless, next winter is discounted about eight cents (winter 2016 is discounted even more — around twenty cents.) These represent good value, especially in the current situation where supplies are tight and prices are not likely to move substantially lower.
Employment numbers for February were released on Friday. They showed that the U.S. added 175,000 workers to nonfarm payrolls. The Department of Labor revised nonfarm payrolls for prior months. Labor estimated that the economy added 25,000 additional jobs in December and January. The unemployment rate rose 0.1 percentage point during the month to 6.7 per cent. The increase in the rate reflected growth in both the size of the labor force and the number of unemployed.
Supply/Demand Balances
The Energy Information Administration’s weekly report on US Petroleum Balances was released for the week ending February 28, 2014.
Inventories of crude oil and products increased 2.2 million barrels during the week.
Crude oil added 1.4 million barrels to storage. Storage in the Midwest fell 2.7 million barrels, all of which reflected the continuing drain at Cushing OK.
Gulf Coast refiners added 4.3 million barrels to stock. Refinery utilization on the Gulf Coast fell to 85.0 per cent and crude runs in that area dropped 237,000 barrels daily. This may be the impact of refinery turnarounds now underway. A similar situation occurred on the East Coast, where runs to stills fell 67,000 barrels per day. Imports of crude oil rose only 75,000 million barrels daily to 7.1 million barrels per day.
Domestic production remained over 8.0 million barrels daily. Output in the lower 48 states remains stalled at 7.6 million barrels daily.
Distillate stocks increased 1.4 million barrels during the report week. Distillate demand came in at 3.5 million barrels daily. This was down marginally and probably was the result of bitter weather easing.
Gasoline demand fell 123,000 barrels daily, now at 8.4 million barrels daily for the report week. Stocks fell 1.6 million barrels to 229 million barrels. Demand has been held in the lower half of the eight million barrels per day bracket since the beginning of the year. This may represent basing before gains in demand expected in the spring.
Propane stocks gained 500,000 barrels, standing at 27.2 million barrels during the week. Demand reportedly rose 58,000 barrels daily to 1.3 million barrels per day.
Natural Gas
According to the EIA: Working gas in storage was 1,196 Bcf as of Friday, Feb. 28, 2014, according to EIA estimates. This represents a net decline of 152 Bcf from the previous week. Stocks were 908 Bcf less than last year at this time and 758 Bcf below the 5-year average of 1,954 Bcf.
The withdrawal was substantially larger than expected by analysts. Prices remain caught in the tension between colder weather, expanded heating demand in the near term and low storage levels on the bullish side and the fast approaching shoulder season with its reduced call on stocks on the bearish side.
The implications of events in the Ukraine may be more important for natural gas than for crude oil. Russia provides about 60 per cent of Ukraine’s natural gas, a huge political hammer. In fact, Gasprom, Russia’s national natural gas company reportedly will no longer provide discounted gas to Ukraine. This is not the first time Russia has used its power in pursuit of national political interests. Export of US natural gas would serve as a counterweight to Russia.
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